*789 1. BUSINESS LEAGUE. - A corporation engaging in a regular business of a kind ordinarily carried on for profit is held not a "business league" within the purview of section 103 of the Revenue Act of 1928, and its earnings and profits are not exempt from taxation.
2. DIVIDENDS. - Distributions of earnings and profits accumulated subsequent to February 28, 1913, are dividends and, under the evidence in this case, are not exempt from taxation as "rebates" or "refunds" to customers.
*1074 Petitioner seeks a redetermination of a deficiency in income tax for the year 1930, determined by the respondent in the amount of $16,319.42.
The issues raised by the pleadings are: (1) Whether petitioner is exempt from taxation under the provisions of section 103(7) of the Revenue Act of 1928; (2) in the alternative, whether certain distributions made by it are rebates or refunds, and not dividends, and should be excluded from its taxable income; (3) whether respondent erred in adding to petitioner's taxable income an item of interest*790 in the amount of $6,601.70; and (4) whether respondent erred in disallowing a deduction for attorney's fees paid in the amount of $450. Issues (3) and (4) were abandoned by the petitioner.
FINDINGS OF FACT.
The petitioner was incorporated under the laws of the State of Illinois, November 16, 1915, with a capital stock of $35,000, consisting of 350 shares of $100 each. The object for which it was formed, set out in the "statement" filed with the proper authorities of the state, was "printing, publishing, engraving, lithographing, and the manufacture, purchase, and sale of books, stationery, office supplies, equipment and merchandise, and to act for others as agent in the sale and distribution of similar lines, and to do such other things as may be necessary for the proper conduct of such business not in conflict with the laws of this State."
The original shares of stock were distributed among 12 individuals in blocks of from 10 to 500 shares each. Its capital stock was subsequently increased to 5,000 shares of the par value of $100 and, on September 22, 1930, was changed to 250 shares of no par value. Thereafter, the following resolution of the stockholders was adopted:
*791 That the stock certificate shall provide that all of the surplus earnings not in the opinion of the Board of Directors required in the conduct and/or expansion of the business of the corporation, shall each year be returned to the customers of the corporation in the proportion that the gross amount of business furnished by any customer, bears to the gross amount of business done by the company, and the decision of the Board of Directors as to the percentage and/or amount to be returned to each customer shall be conclusive.
New certificates of stock were issued containing the language specified in the resolution. The stockholders of the petitioner were its sole and only customers.
Prior to the formation of petitioner the various fire insurance companies had their own blank forms printed and distributed to their *1075 agents. In many instances the form differed. The various agents, although representing numerous companies, were expected to keep, and commonly did keep, on hand a more or less complete supply of forms furnished by each company. The disadvantages of such an arrangement were obvious and in order to overcome them, the representatives of two associations*792 in the middle western portion of the United States, known respectively as the "Union" and the "Insurance Bureau" devised the plan of having all the member companies of the two associations use the same forms.
The petitioner corporation was organized to handle the printing and distribution of such forms "functioning as a supply department of a number of companies." In addition, it, through its representatives, consulted with the state insurance departments and disseminated to the various companies information and rulings of especial interest to them.
The business was begun in a small way simply with the printing of uniform forms but it was soon ascertained that the cost of those forms would be very much increased unless general work could be secured to keep the plant busy during the time when the uniform forms were not being printed. The member companies were therefore permitted to have their other printing work done there and the plant was extended from time to time to meet the necessities of the growing business.
The petitioner, during the taxable year, occupied a five-story building located at 341-351 West Chicago Avenue, approximately one hundred feet square with a total*793 of approximately fifty or sixty thousand square feet of floor space devoted to its business. It had printing presses on three floors of the building, the other floors being used for storage and other purposes incident to the business, and it employed approximately one hundred and fifty employees.
The blank forms printed by petitioner were supplied direct to the agents upon requisition from a member company. The bill or statement for the forms so distributed was rendered monthly to the Uniform Forms Committee, the membership of which was composed of representatives of the two associations "Union" and "Insurance Bureau." Requisitions were based upon the experience of the previous period, the actual cost was determined, 10 percent thereof was added, and the bill was submitted upon that basis with the understanding that such amount was the maximum to be paid. The bills were paid by the associations out of funds raised by assessments against the member companies based upon the business transacted, that is, upon the premiums written by each. In some instances the petitioner printed insurance policies for the companies and a charge for such service was made and paid directly without*794 the *1076 intervention of the associations. It was the policy of the company to print and distribute forms and policies at a price which would be sufficient, and only sufficient, to pay the expenses of operating and maintaining the plant and organization.
During the year 1918 petitioner did a gross business of approximately a quarter of a million dollars. This progressively increased during subsequent years to approximately a million dollars in 1921, 1922, 1923, and 1924, a million and a quarter dollars in 1928, and more than a million and a half dollars in 1929 and 1930. No distribution of profits or of capital was made prior to 1930. Its balance sheet at the end of the taxable year 1930, was of follows:
| ASSETS | ||
| Cash | $229,770.51 | |
| Accounts Receivable | 141,301.66 | |
| Inventories | 211,839.53 | |
| Deferred Charges | 1,167.09 | |
| Capital Assets | $802,700.80 | |
| Less Reserve for Depreciation | 442,794.55 | |
| 359,906.25 | ||
| Cash - Equipment Fund | 23,804.37 | |
| 967,789.41 | ||
| LIABILITIES | ||
| Accounts Payable | $2,584.61 | |
| Accrued Expenses | 3,822.94 | |
| Other Liabilities | 1,635.00 | |
| Capital Stock (common) | 250,000.00 | |
| Uniform Forms Committee - Trustees | 709,746.86 | |
| 967,789.41 |
*795 The petitioner's method of doing business was not changed in 1930, but after the change in its corporate structure on September 22, 1930, from 5,000 shares of the par value of $100 per share to 250 shares of no par value, there was distributed in December of 1930, $128,943.46, the entry upon the books reading as follows:
Uniform Forms Committee Trustee:
Net amount in excess of costs, subject to refund to customers for year ending Dec. 31, 1930.
To segregate and transfer from the former acct. the results of operations for the year ending Dec. 31, 1930, representing the net amount in excess of costs for that period which are subject to refund to customers, and which were credited to the former a/c during 1930 upon the closing of the books as follows:
| June 30, 1930 | $81,612.19 |
| Dec. 31, 1930 | 47,331.27 |
| 128,943.46 |
*1077 The amount was determined by the "Accounting Department finding out the excess over actual cost for the year." In other words, it was based upon "the proportion of the individual purchases, of the companies' individual purchases, in relation to the gross sales for the year, to all." The distribution was not made upon the basis of stock*796 ownership. A sheet attached to petitioner's 1930 return contains the following statement: "This corporation is a business league not organized for profit and all net earnings are turned over to the Uniform Forms Committee for distribution to its stockholders."
In schedule L of its income tax return for the year 1930, under the heading "Reconciliation of net income and analysis of changes in surplus" petitioner listed as "Net Profit for year, as shown by books, before any adjustments are made therein," the same amount as shown in the preceding finding, i.e., $128,943.46. This amount was included in its gross income and deducted as "non-taxable income" in computing its net income. The deficiency herein results from respondent's adding this amount, together with an item of interest - $6,601.70 and attorney's fees - $450, to the taxable net income reported by petitioner.
OPINION.
MELLOTT: Petitioner contends that it is exempt from taxation under the provisions of section 103(7) of the Revenue Act of 1928, 1 shown in the margin. It contends that it is a "business league" not organized for profit and that no part of its net earnings inured to the benefit of any private stockholder*797 or individual. In the alternative, it contends that the sum of $128,943.46 distributed by it to its customers, all of whom were stockholders, represented "rebates" or "refunds" which should be excluded from its taxable income.
We shall discuss these contentions in the order of their statement, but before doing so shall dispose of respondent's plea in bar, presented upon brief, in which he avers that a previous decision of this Board is res adjudicata of the issues raised herein, citing in that connection Tait v. Western Maryland Railway Co.,289 U.S. 620">289 U.S. 620.
The previous decision relied upon is Uniform Printing & Supply Co.,9 B.T.A. 251">9 B.T.A. 251; affd., *798 33 Fed.(2d) 445; certiorari denied, 280 U.S. 591">280 U.S. 591. *1078 In that case it was held that this petitioner was not a business league and its claim for exemption was denied. In affirming the decision of the Board, the court, after adverting to the fact that the profits or net income of the petitioner was included in the value of the property owned by it, which, upon dissolution, might be divided among the stockholders, said:
It necessarily follows therefore that the petitioner was organized for profit, and that the profits or net income of petitioner company for the year 1918 did inure to the benefit of the stockholders, thereby removing it from that class of taxpayer which is exempt under section 231(7) of the Revenue Act of 1918 [which section is identical with setion 103(7) of the 1928 Act in all particulars here important].
In Tait v. Western Maryland Railway Co., supra, the Supreme Court decided that parties are "concluded in a suit for one year's tax as to the right or question adjudicated by a former judgment respecting the tax of an earlier year," and that both the Government and the taxpayer should be relieve "from redundant*799 litigation of the identical question of the statute's application to the taxpayer's status."
The petitioner argues that the evidence presented in the former proceeding differs from that in the instant case and lays emphasis upon the change made in its corporate structure as reflected in our findings, namely, the change which occurred on September 22, 1930. It also stresses the fact that the new stock certificates provided that the surplus earnings not required in the conduct and expansion of the corporation's business should be returned to its customers.
Respondent's contention has substantial merit, and it may be that the previous decision of this Board, affirmed by the courts, is res adjudicata. We prefer, however, to resolve the doubt in favor of petitioner and to determine whether or not, under the facts and the evidence before us, it is entitled to exemption.
Do our findings show that petitioner is exempt from taxation as a business league within the purview of section 103(7), supra?
Article 528 of Treasury Regulations 74 reads as follows:
Art. 528. Business leagues, chambers of commerce, real estate boards, and boards of trade. - A business league is an*800 association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus its activities should be directed to the improvement of business conditions or to the promotion of the general objects of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. An association engaged in furnishing information to prospective investors, to enable them to *1079 make sound investments, is not a business league, since its activities do not further any common business interest, even though all of its income is devoted to the purpose stated. A stock exchange is not a business league, a chamber of commerce, or a board of trade within the meaning of the law and*801 is not exempt from tax.
This administrative interpretation of the term "business league" has continued over a period of several years. By clear implication it has been ratified by Congress in the reenactment of the provision here under consideration without substantial change. It is, therefore, entitled to great weight and should not be disturbed. United States v. Hermanos y Compania,209 U.S. 337">209 U.S. 337, 339; United States v. Falk,204 U.S. 143">204 U.S. 143, 152; United States v. Safety Car Heating & Lighting Co.,297 U.S. 88">297 U.S. 88.
The courts and this Board have frequently held that to be exempt from income tax the petitioner must show three facts - (1) that it is a business league, chamber of commerce, real estate board, or board of trade; (2) that it is not organized for profit; and (3) that no part of its net earnings inures to the benefit of any private stockholder. Clearly no other interpretation of section 103(7) can be mdae. Cf. Northwestern Jobbers Credit Bureau,14 B.T.A. 362">14 B.T.A. 362; affd., *802 37 Fed.(2d) 880; Produce Exchange Stock Clearing Association, Inc.,27 B.T.A. 1214">27 B.T.A. 1214; affd., 71 Fed.(2d) 142; Fort Worth Grain & Cotton Exchange,27 B.T.A. 983">27 B.T.A. 983; Adjustment Bureau of St. Louis Association of Credit Men,21 B.T.A. 232">21 B.T.A. 232; Louisville Credit Men's Adjustment Bureau v. United States,6 Fed.Supp. 196.
In its brief petitioner states that the decision of the Board in its earlier case (Uniform Printing & Supply Co., supra,) indicates that the possibility of dividends, or the possibility of an accumulation of income, was the reason why it was denied the exemption therein claimed, and that it has now rendered such possibilities impossible by amendment to its charter and by-laws. It apparently overlloks, however, the following language in the decision, which, notwithstanding the amendments relied upon, is still applicable: "This taxpayer does, in part at least, 'engage in a regular business of a kind ordinarily carried on for profit' and therefore unless the regulation is wrong it must be enforced and the exemption denied." Petitioner has made no change in the nature*803 of its activities. It still operates a large printing establishment from which it derives its earnings and is clearly engaged in a regular business of a kind ordinarily carried on for profit.
While the above holding is sufficient to warrant the denial of the claimed exemption, it should be noted in passing that petitioner's surplus earnings will, very definitely, inure to the benefit of its stockholders. The resolution specifically provides that "all of the surplus earnings not in the opinion of the Board of Directors required *1080 in the conduct and/or expansion of the business of the corporation, shall each year be returned to the customers of the corporation in the proportion that the gross amount of business furnished by any customer, bears to the gross amount of business done by the company * * *." The stockholders of the petitioner are its sole and only customers. Any distribution of earnings must, therefore, and does, inure to the benefit of its stockholders.
The fact that some of the stockholders may not receive distributive shares in any particular year because they have furnished no business to petitioner is immaterial. All of the stockholders will eventually*804 receive some benefit from the earnings which have been used for the expansion of the business of the corporation.
That a large proportion of its profits has been devoted to this purpose is apparent from the fact that although it started with an initial investment of $35,000, it now has total assets of nearly $1,000,000. Notwithstanding the change in petitioner's charter and bylaws, therefore, we are satisfied that its profits do inure to the benefit of its stockholders. It is not a "business league" within the purview of section 103(7) of the Revenue Act of 1928.
The remaining question is whether the distribution made by the petitioner was, as contended by it, a "rebate" or "refund", or a "dividend" within the meaning of the word as used in the revenue act. The statute (sec. 115, Act of 1928) says that a dividend "means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913." Clearly, the distribution made by petitioner was a part of its earnings or profits accumulated after February 28, 1913. It was made to its shareholders in money, and falls squarely within the*805 statutory definition of a dividend.
The citation of additional authorities is supererogatory. Reference to a recent decision by the Circuit Court of Appeals for the Second Circuit, however, may be helpful. In Produce Exchange Stock Clearing Association, Inc. v. Helvering, supra, substantially the same contention was made as is here being made by petitioner. The court, holding that the statute was never intended to grant an exemption from tax to an association "which merely serves each member as a convenience or economy in his business", said:
The statute could never have contemplated that by creating a subsidiary corporation to furnish such facilities, even though they were intended to be performed at cost, it could obtain tax exemption for its creature.
We must, and do, hold that petitioner is not entitled to exemption from taxation, and that the respondent committee no error in determining the above deficiency.
Judgment will be entered for the respondent.
Footnotes
1. SEC. 103. EXEMPTION FROM TAX ON CORPORATIONS.
The following organizations shall be exempt from taxation under this title -
* * *
(7) Business leagues, chambers of commerce, real estate boards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual; * * * ↩